We’re not our grandfathers’ millionaires

Tuesday, September 27, 2011

An article appeared in this Saturday’s Post by author John Steele Gordon trying to dispel some “myths” about millionaires. Not a lot new here—anyone who’s anywhere close to calling themselves a millionaire has no illusions about how “rich” they are, at least relative to the truly wealthy. The piece made some good points—regardless of Warren Buffet’s claims the less well off don’t actually pay more tax than those who live off of investment income. However, its claim that half of Americans don’t make enough money to pay income tax at all is misleading. All of us contribute “payroll taxes”, which look and smell a lot like income tax, especially when you are an independent contractor like myself and have to pay the entire 18 percent tax. It also doesn’t mean the poor don’t pay state, local, sales, and all the other myriad taxes imposed on people living in this country. A Washington Post study found that the poorest among us pay around 16 percent in total taxes, the richest around 31 percent. Why don’t we start with that as a baseline for a serious discussion and dump the spin and weasel words.

His point about how taxing millionaires will limit investment was also misleading. Sure, taxes impact investment decisions, but as the 1990s demonstrated, tax rates that can sustain government policies we apparently want to keep do not kill our desire to invest. Quite the opposite. And his assertion that the tax cuts of the 2000s were responsible for the increase in tax revenues and decrease in employment is nonsense. The Bush era was a party fueled by low interest rates and deceptively increasing property values, which made people feel rich and spend more than they should. People over borrowed and the economy grew, at least until we were tapped out. The flip side of all that illusory wealth was an increase in property taxes (in my case a tripling), which more than canceled out the benefits of the Bush tax cuts for most of us. It was a time of recklessness and stupidity, and we are all going to have to pay to clean it up, including the wealthiest among us.

Author responds:

If FDR had set up Social Security as a retirement program, with the money paid in going into a separate account that the individual owned, payroll taxes would not be “taxes,” they would be “mandatory deposits” or some such.

Unfortunately, politics—and economic reality if anyone was to receive significant benefits from Social Security in a politically useful time-frame—led him to set up a system with the illusion of individual accounts without the reality.

Further more, if surplus funds received by the Social Security were invested in federal bonds bought in the market place instead of the money going to the Treasury, which issues special federal bonds for it, Congress could not have gotten its hands on the money and used it as if it were tax money. If a corporation took the employee contributions to the company pension fund, replaced it with corporate bonds, and called the money “income,” the execs would all be washing each other’s laundry in Club Fed. It’s an accounting scandal that makes Enron look like petty theft.

I would disagree with your analysis of the Bush years. The revenue increases and falling unemployment coincided nearly exactly with the implementation of the tax cuts. The party you mention was already underway at that point, courtesy of Alan Greenspan and Fannie and Freddie.